Russian Banks Look to Yuan Bond Market

Russian banks are increasingly selling bonds in the offshore yuan market as growing demand allows them to borrow at cheaper rates and gives them a chance to diversify their funding bases.

Investors say they are keen to buy the bonds because they are often issued by state-backed, high-profile Russian banks and offer an attractive yield and exposure to the Chinese currency, known as the renminbi, or yuan.

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Russian banks—including JSC VTB Bank, Russian Agricultural Bank OAO and Russian Standard Bank ZA—have already sold the equivalent of $480 million of the bonds this year, compared with $309 million in the previous three years. Gazprombank OAO, the financing arm of energy giant
Gazprom
,
also issued yuan debt.

The trend illustrates the growing prominence of the offshore renminbi market. Standard Chartered expects issuance to total between 320 billion yuan ($51.3 billion) and 350 billion yuan this year, up from last year's record of 267 billion yuan.

"What's driving this largely is yield, some expectation of currency appreciation and the need for investors to put their renminbi somewhere while they wait," said
Edmund Harriss,
director at Guinness Asset Management.

"A large percentage of bond issuance in the offshore renminbi market are from either China or Hong Kong, and for European-based investors who might not be familiar with these companies, the risk profile of these issuers may be deemed to be on the high side," said
Liang Choon Koh,
head of Asia fixed income at Nikko Asset Management.

"They [investors] are more comfortable with issuers that have recognizable brand names and those that are investment-grade rated."

VTB, Gazprombank and Russian Agricultural Bank are all investment-grade rated, quasi-sovereign borrowers, with experience issuing in the dollar and euro markets. Russian Standard Bank has a high-yield rating, but is the country's biggest lender to consumers and one of its largest privately owned banks.

Mr. Koh said he looked at all three investment-grade issuers from Russia, and bought some of the debt, but declined to say which banks' bonds he bought. Nikko Asset Management has a total of $154 billion in assets under management.

Demand for the yuan-denominated debt is allowing the banks to borrow at cheaper rates than they could in the dollar or euro markets.

For example, Russian Agricultural Bank sold a three-year 1 billion yuan bond with a yield of 3.6%. It pays 5.3% to investors in the dollar market for debt of a slightly longer maturity of five years.

Alan Roch,
head of bond syndication for the Asia-Pacific region at the
Royal Bank of Scotland Group
PLC, one of the banks that placed the Russian Agricultural Bank bond, said he was very confident of selling the Russian bank's debt at a discount to the dollar market even before his team visited prospective investors to pitch the sale.

The Singapore-based banker said RBS was seeing growing interest in issuing yuan debt from non-Chinese issuers and Russian names in particular. At the same time, demand to buy the debt is deepening as investors seek to diversify.

"European issuers have been quicker in identifying this and the more that come and issue in renminbi, the more will want to follow, as their comfort on the execution of these deals improves," said Mr. Roch.

Artyom Lebedev,
a spokesperson for Russian Standard Bank, said the attractive cost of funding in yuan and the opportunity to diversify the bank's debt portfolio meant it would be eager to sell more debt in the offshore renminbi market.

Since being sold, the Russian yuan bonds have performed well on the secondary market. Yields on the debt are lower than when it was issued.

However, Russian bonds aren't without dangers. Investors have highlighted economic and political risk in Russia and stagnant growth in Europe.

"If you are an investment-grade-rated borrower, you will have no problems because investors are looking for savvier issuers," said
Augusto King,
who is head of debt capital markets for Asia at RBS.

Mr. King said a large amount of yuan bonds are due to be paid back this year, meaning investors would have to find a new home for their money at a time when debt sales from Chinese banks in the offshore market have been low. The offshore yuan market has so far been largely dominated by state-owned Chinese companies and Chinese government entities looking for foreign investors.

"The pickup in issuance is largely demand-driven, because Asian investors have increased allocations to emerging market debt," said
Mikhail Nikitin,
credit analyst at VTB Capital. He also said that for Russian banks, selling debt in yuan not only diversified their funding but helped them avoid potential oversupply to Europe and the U.S.

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